Can Pacific Trade Deal Be Fixed to Banks' Liking?

WASHINGTON — On its face, the Trans-Pacific Partnership seems like something large multinational banks would enthusiastically support. But the industry's backing of the trade deal is at risk from a provision excluding banks from certain data-related commitments enjoyed by others.

The pact — for which the Obama administration is trying to get congressional approval — would promote data transfers between countries and prevent nations from forcing companies to house localized data centers as a condition to conducting trade. Yet U.S. regulators successfully sought a carveout for financial services firms that would still subject them to data localization requirements. Regulators worried the liberalized data rules would limit their access to information needed for prudential supervision.

"As an industry … we are very supportive of free trade … but with TPP there is one specific concern we have with the agreement and the structure which" is that financial institutions do not receive the "guarantees [given] to companies that government cannot impose data localization requirements on them," said Peter Matheson, managing director of international policy and advocacy at the Securities and Financial Markets Association.

Yet there is still hope for the industry that the provision could be changed. Although the administration is unlikely to renegotiate the pact signed by 12 nations in February, U.S. officials have appeared sympathetic to the industry's concerns in the period since the carveout was added. A separate trade deal still being negotiated could address the data localization issue, while remaining uncertainty about U.S. ratification of the TPP against the backdrop of the presidential race opens the possibility for there to be changes.

"If TPP is not ratified before Christmas of this year then it is going to go to the next Congress and the next president, and if it's Hillary [Clinton], she is probably going to reopen the TPP anyway, because right now she is opposed to it for political reasons, and in order for her to support it she is going to have to make some sort of a substantive fix that is going to require that she reopen it," said Dan Ikenson, director of the trade policy studies at the Cato Institute.

The TPP deal would open up trade channels by eliminating tariffs and barriers for U.S. exports as well as level the playing field for businesses that compete for trade across borders, among other things. Banks stand to benefit significantly inasmuch as their customers would be able to increase exports and investment overseas and financial institutions would be better positioned to compete for foreign business.

Banks were initially seen as big winners in the trade deal, but the effort to force them to keep localized data centers has given many in the industry pause.

"We had no idea this was coming. The U.S. regulators asked for that to not be included in financial services so that they could have all the data that they need for safety and soundness regulatory purposes," said a financial services lobbyist, who asked not to be named. "We really like TPP but for this one thing, and if we enshrine this into law we are really hurting ourselves. At this point I am not able to say that we support this because we haven't fixed it completely."

Industry insiders say the carveout could hurt data privacy efforts, while requiring local data centers also provides more channels for cybercriminals to hack into banks' systems. They also warn that there is a significant price tag if multiple countries require institutions to maintain local computerized data centers, which can cost tens of millions of dollars.

"The mandatory localization of data processing would, among other things, hinder the industry's ability to safeguard customers' data, and it vastly diminishes protections against cyberattacks because spreading out this kind of data creates more doors to knock on and more ways by which to hack into the system," said a financial services executive, who also spoke on the condition of anonymity.

Treasury Secretary Jacob Lew testified before Congress in February that U.S. regulators do not want the trade deal to mean that data they need for supervising banks is suddenly out of reach. But he added that U.S. policymakers were trying to respond the financial industry's objections.

"One of the issues here is the requirements of our regulators in terms of how they view what they need to have their … reviews of financial institutions," Lew said, according to a transcript of the hearing. "So as we are in an international space we can't give away something that our financial institutions, our financial regulators, would need here in the United States. But we are working with industry and the financial regulators as we go through this.

"We're sensitive to the concerns. It is certainly not something that is designed to put a burden on — was meant to put a burden on U.S. financial institutions."

Efforts to address industry concerns were more explicit when government officials released a term sheet in May floating a "new approach" by Treasury and the U.S. trade representative "to data localization and financial services."

The term sheet included a proposed framework for any future negotiations, which appeared to largely reverse the administration's position. The new framework called for prohibiting localized data requirements "when financial regulators have access to information stored abroad," clarifying allowances on cross-border transfer of information and requiring regulators "to engage" with companies before "imposing data localization measures."

"The U.S. government has really [made] a genuine effort to resolve this issue," Matheson said.

But with the 12 countries already agreeing to the TPP, and the deal already having been subject to years of negotiations, making changes at this point would be difficult.

The administration "didn't want to reopen the TPP for a variety of reasons," Ikenson said. "There is a lot of different horse-trading in these deals, and if you ask for something then you are going to have to concede something else."

Rather, the administration has devised a fix by implementing the new data policy in a proposed trade deal known as the Trade in Services Agreement. That trade pact, which is still being negotiated, includes many countries in the TPP as well as the European Union. The idea is for a data provision in the TiSA to supersede the TPP agreement. (Separate negotiations with four TPP nations not in the TiSA — Brunei, Malaysia, Singapore and Vietnam — would have to take place.)

"This is an important, collaborative solution that will help build momentum for reaching consensus in other areas of TPP," U.S. Trade Representative Michael Froman said in a statement. "It shows that when we dig into the details with stakeholders and members of Congress, we can find common ground approaches that satisfy a range of priorities."

Yet any potential changes are being discussed against the backdrop of more general uncertainty about the U.S. approval of the TPP. Despite the Obama administration's attempts to get the deal approved by Congress, several Democratic lawmakers oppose the deal.

The potential failure to ratify it before a new president takes office would pose more uncertainty. GOP presidential front-runner Donald Trump has staked out a strong anti-free-trade position, while Clinton has criticized the deal after previously supporting a trade agreement as secretary of state.

Ikenson said that if a Clinton administration sought to revise the TPP, that could be a better solution for the banking industry than relying on separate trade deals.

"How long that takes, who knows, because I don't know what other countries are going to demand," Ikenson said. "But when it is open she could make this fix and that would be cleaner."

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